Written by the Market Insights Team
UK-US trade deal is symbolic at best
George Vessey – Lead FX & Macro Strategist
It is the first trade deal agreed after President Trump began his second presidential term in January, and after he imposed strict tariffs on countries around the world in April. It is symbolic for this reason, but we think it reinforces our view that tariffs are unlikely to go away anytime soon. Still, markets are cheering the news. The main beneficiary in the FX space has been the US dollar, with GBP/USD erasing its earlier gains to trade closer to $1.32. Elsewhere, sterling appreciated across the board, finally hurdling the €1.18 handle versus the euro and jumping over 1% against the Japanese yen, though these gains have been partially eroded overnight.
The final details of the UK-US trade pact will still be negotiated over the coming weeks, but here’s what we know. The UK steel and aluminium industries will no longer face any tariffs after they had 25% duties placed on them. The deal appears to centre predominantly around cars, the US’ sixth-top export to the UK and the UK’s top export to the US. The first 100,000 vehicles imported into the US by UK car manufacturers each year are subject to the reciprocal rate of 10% and any additional vehicles each year are subject to 25% rates. That’s a change from the 25% tariff in place for foreign cars shipped to the US but still leaves UK carmakers worse off than before.
Moreover, in our view, given 10% tariffs will remain on most other UK goods into the US, this trade deal is not a positive indicator for broader tariff de-escalation. With the US running a $12bn goods trade surplus with Britain in 2024, the UK’s inability to negotiate a lower rate suggests nations with US trade deficits may face even tougher terms.
Fed overlooking stagflation risks
Kevin Ford – FX & Macro Strategist
The Federal Reserve (Fed) remains in wait-and-see mode, letting economic conditions play out before making any policy moves. Unlike 2019, when it acted pre-emptively, the Fed claims that there’s no urgency for intervention, and stagflation concerns aren’t front and center, at least not yet. Still, Powell’s worst fears could already be unfolding, with ISM manufacturing price trends potentially informing inflation in the coming weeks, even as front-running distorts short-term data.
Markets are riding a wave of optimism, with US stocks rallying Thursday on hopes of lower tariffs. The White House is framing this as a trade war victory, buoyed by the UK trade deal announcement and upcoming talks with China. The S&P 500 and Nasdaq 100 both gained over 1%, erasing earlier losses and hitting their highest levels since March. However, the baseline 10% tariff remains unchanged, signaling that double-digit tariffs are likely here to stay. The deal grants preferential tariff access for UK-imported vehicles and partial relief for steel and aluminum products. In exchange, the UK opened its market to $5 billion in US exports, primarily in agriculture, chemicals, and machinery. The big question remains, are markets getting ahead of themselves? While sentiment is strong, the true economic impact of tariffs has yet to unfold. Time will tell if this optimism can sustain markets through the summer.
The dollar, which didn’t have the same level of participation in the recent rally, has rebounded this week on trade optimism, climbing past 100 for a second straight session, fueled by hopes that the US-UK trade deal could be the first of several. Yesterday, the greenback gained most against the yen and Canadian dollar but gains against the British pound were limited after the Bank of England (BoE) delivered a widely expected rate cut while striking a surprisingly hawkish tone.
A 3-way split signals ambiguity
George Vessey – Lead FX & Macro Strategist
The BoE cut interest rates by 25 basis point to 4.25% as expected, delivering a clear signal for further easing. But it wasn’t without mixed messaging. Five out of nine Monetary Policy Committee (MPC) members backed the cut, two dissenters wanted a bigger half point cut and two opted to hold rates at 4.5%. This triggered a modest hawkish market reaction with gilt yields rising and GBP/USD creeping back towards its 100-day moving average at $1.3337 though the UK-US trade deal scuppered the rally amidst a boost in USD demand.
Markets had expected the vote split to be 8-1, but it ended up reflecting a more balanced mix. The two holdouts at 4.5% were highly unexpected and as a result, in the immediate wake of the decision at least, traders started to pare back their expectations for another rate cut next month. The main takeaway away from this unusual voting pattern is the amount of uncertainty the future holds. These internal divisions often signal the challenges ahead for monetary policy. As such, the minutes laid out two scenarios that the BoE is looking at. One where there is more persistence in wages and price pressures and one where inflation pressures dissipate faster. Policymakers emphasised ‘substantial’ inflation progress, slowing growth, loosening labour markets, and a likely ‘significant’ slowdown in pay growth through the rest of the year. But monetary policy is not on a pre-set path and decisions will remain sensitive to heightened unpredictability in the economic environment.
The clear pushback against cutting more quickly means we stick with our call that the cut-hold tempo will continue, with 25bp cuts in August and November taking Bank Rate to 3.75% by year-end.
Dollar index rebounds above 100
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Calendar: May 5-9
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
